US dollar could fall from 20-year high if Fed stops rate hike

In 2022, the dollar has jumped more than 10% against other major currencies, having strengthened to levels not seen since 2002. But a shift away from its aggressive rate-hike campaign by the Fed would send the dollar lower, economist Barry Eichengrin said. The idea that inflation will remain in the high single digits and the Fed will continue its tightening cycle is “quite difficult,” he wrote in the Financial Times. Loading something.

A top economist said the US dollar is near a 20-year high, but the greenback’s direction will reverse as the Federal Reserve pulls away from its aggressive rate-hike campaign.

In 2022, the dollar has jumped more than 10% against other major currencies, consolidating levels not seen since 2002, as the Fed moved interest rates at a more rapid pace than other central banks around the world. That is, UC Berkeley economist Barry Eichengrin wrote recently in the Financial Times.

Russia’s war on Ukraine, rising US-China tensions over Taiwan and geopolitical risks related to Iran could also strengthen the dollar’s position as a safe haven for investors.

“But at the end of the day, recent currency movements have been driven by central banks. The same will be true going forward,” Eichengreen said.

He added that the Fed is behind the curve in tackling inflation, with the market already priced in anticipation of additional rate hikes, meaning that any future hikes are unlikely to propel the dollar further. , They said.

Meanwhile, central banks in other countries are getting more aggressive with their own rate hikes, and the dollar has already slipped against a basket of other major currencies, he said.

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And the risk of a US recession is rising sharply, while the current dollar price is based on expectations that the Fed will continue to raise rates in the midst of an expanding economy, Eichengreen said.

In fact, government data released Thursday shows the US economy shrank for the second quarter in a row – an informal definition of a technical recession.

“The idea that, in these recessionary conditions, inflation will remain in the high single digits and therefore the Fed will be forced to continue its tightening cycle, is quite difficult,” Eichengreen wrote before the GDP figures were revealed.

While shares rose on Wednesday on remarks by Fed Chairman Jerome Powell that a slowdown in rate hikes is likely as policy becomes more restrictive, central bank watchers on Wall Street warned that markets were mistaking the Fed. way of reading.

For example, Renaissance Macro Research predicts that inflation is unlikely to come down fast enough for the Fed to pivot. Piper Sandler said Powell’s remarks “are not the words of the Fed chairman who is moving towards a nostalgic stance.” And analysts at NatWest Markets said the outlook on the fed funds rate could be even higher.

But in Eichengrin’s view, there is little indication that inflation will be so stubborn that it will require continued aggressive rate hikes.

“So if the economy and inflation weaken, the Fed will stall, and the dollar will reverse direction. This is no longer a risk that can be dismissed,” he concluded.

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